Gold prices fell to their lowest level in two months as new clashes between the US and Iran increased concerns that the peace process could be disrupted, amid rising inflation risks and a stronger USD putting further pressure on the precious metal. At one point, gold prices fell nearly 2%, falling back to around the threshold of 4,365 USD/ounce.
New developments appeared just hours after US President Donald Trump declared he was "not satisfied" with the negotiation process with Iran, which has reduced expectations of an early breakthrough in the near future.
Mr. Trump has also not provided details on measures to ensure maritime traffic through the Strait of Hormuz - one of the key issues to resolve the current conflict.
The serious disruption on the strategic energy transport route has caused oil prices to rise sharply since the end of February, thereby raising concerns about global inflation.
Even if a peace agreement is reached, the high energy price level could still cause prolonged inflationary pressure, forcing central banks to postpone monetary easing plans that were expected before the Iranian conflict broke out.
Gold is often disadvantaged in a high interest rate environment because precious metals do not bring yields. The strengthening USD also makes gold more expensive for investors holding other currencies.
Since the Iranian conflict broke out at the end of February, gold prices have fallen by more than 17%, almost wiping out the entire increase from the beginning of the year.
US Federal Reserve (Fed) Governor Lisa Cook also said on Wednesday that inflation is developing in an unfavorable direction and the Fed is ready to raise interest rates if this situation continues.
Meanwhile, signals from the options market show that traders are gradually reducing expectations of price increases for gold and believe that the level of strong volatility may cool down in the near future.
Implicit fluctuations of SPDR Gold Shares fund - the world's largest gold ETF have decreased sharply. Options fees betting on the possibility of gold prices increasing in the next three months are also close to the lowest level since December last year.
Mr. Justin Lin - Investment Strategist at Global X ETFs Australia said that investors are gradually losing faith in the safe haven role of gold in the short term as cash flow tends to shift to assets with more attractive returns.
He believes that if oil prices continue to rise, gold may find a support zone in the range of 4,000 - 4,250 USD/ounce.
